Brazils debt crisis hits the private sector

Brazils debt crisis has hit the private sector. Brazilian companies are now so seriously indebted with their revenue falling, because of a serious economic recession, that some might call a depression, that they have lost the ability to honor their commitments.

Almost half (49%) of the larger companies in the country have cash generation that is not even enough to pay their interest debts which is a serious scenario, explaining the large increase in defaults, renegotiations with creditors and an escalation of requests for legal relief ( Chapter 11 style ).

For economists, the situation is as serious as the national debt. The financial weakness of large and medium sized companies means that there is an even greater risk of increased unemployment and a delay in reactivating the national economy than there would be otherwise.

A survey conducted by the Study Centre of Ibmec Institute (Cemec) reflects this concern.

In a group of 605 large companies (349 are now closed with 256 still operating), cash generation was sufficient to pay only 58% of financial cash expenses.

The priority for companies today is to reduce debt to avoid bankruptcy. Even remotely thinking of new investments is out of the question, according to economist Carlos Rocca, technical director of Cemec, responsible for this survey.

The situation is the opposite of that of before 2013, when companies lived in a generous and cheap credit environment in a growing consumer market.

“Suddenly, the expectations have collapsed and there was a panic within companies which were already highly leveraged,” says Rocca.

The work done by the economist portrays the companies debt trajectory and the rapid deterioration of financial indicators from 2014.

The leverage ratio, for example, has grown exponentially. In 2010, 36% of the equity of listed companies (excluding Petrobras) was debt. This share rose to 109% in the first half of this year. Moreover, the share of debt in foreign currency more than doubled in that period to 60% ( mostly USD ).

The advancement of these indices, however, would not be a big problem if the country had not gone into severe recession with consumption plummeting. Combined with this is the fact that the currency ( Real ) has had a strong devaluation, which further pressured corporate debt ratios.

Between 2010 and 2015, companies debt raised by Cemec had a 173% jumped to R $ 1.9 trillion.

“There was a radical, structural change in the financial governance of companies,” says the researcher from the Brazilian Institute of Economics (Ibre), José Roberto Afonso, Professor of Public Law Brasiliense Institute (PDI).

According to him, in the past a striking and peculiar trait of Brazil was a country with a low aggregate debt throughout the economy where much of it was very concentrated in the government; an unusual pattern in other economies, including emerging ones. Now that has all changed for the worse.

In this new scenario, companies live with a new challenge: the rigidity of financial institutions to lend money and the increased costs of raising money.

“Banks are becoming more selective in lending and demanding more robust guarantees in quantity and quality assets to cover that risk,” said Fabio Bragathe, a member in the banking law area and restructuring of Demarest Bar.

With weak finances, more expensive costs and without other credit options, many companies are becoming delinquent payers.

The Central Bank data shows that the late fee payment of some types increased last year. In working revolving capital loans, for example, they rose from 7.7% to 10.5%.

“Those who cannot renegotiate their debt will have to look at bankruptcy,” says Artur Lopes, consultant at Artur Lopes & Associates who specialise in crisis management. As at August this year, the number of bankruptcy orders had increased 60% over the same period last year, from 766 to 1,235.

“For now, there is no expectation of improvement’, says Ricardo Carvalho, senior director of risk rating agency Fitch Ratings companies. “The expectation is that the debt will continue to grow, pushed by the high cost of debt.” The agency has reviewed a dozen companies ratings in recent months.

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